It's the income statement and the earnings miss that is getting all the attention at Jos. A. Bank (NASDAQ:JOSB), but in truth, it's not really the income statement that investors should be focusing on. That may be where everyone focuses, but the gremlins at Jos. A. Bank have always been on the balance sheet.

Before diving into the financials, I think this quote from CFO David Ullman in the company's press release deserves some attention: "While our sales of new transitional spring products remained consistent with last year, gross profits declined primarily as a result of increased customer demand for fall merchandise, resulting in less demand for the year-round core merchandise."

This is interesting, because I seem to remember the company stating on its conference calls that having high levels of inventory wasn't a real risk, because the company deals in staples that don't go out of style. This may still be the case, but I am now wondering whether the company's high inventory levels and poor cash flow have finally caused it to discount out-of-season items rather than putting them in mothballs for six to nine months and bringing them back out.

I've written about this before, and other Fools have as well, but given that this is the first time Jos. A. Bank has missed earnings in some time, it's worth taking another look at the company's balance sheet and working capital management. Here is a look at some of the balance sheet items for Jos. A. Bank this quarter with a year-over-year comparison.

Assets

1Q 2006

1Q 2005

Change

Cash + ST Invest.

$852

$2,137

(60.1%)

Accounts Rec.

$7,918

$9,080

(12.8%)

Inventory

$184,005

$144,614

27.2%


Liabilities

1Q 2006

1Q 2005

Change

Accounts Payable

$35,168

$42,724

(17.7%)

Long-Term Debt

$17,410

$15,709

10.8%

Having looked at the data over the years, I'd say the biggest concern continues to be the company's working capital management, particularly inventory. Its working capital management, or lack thereof, continues to drive the company's cash conversion cycle higher, as can be seen in the table below.

Fiscal Year

CCC in Days

2005

266.6

2004

250.6

2003

229.5

2002

226.4

2001

173

Source: Capital IQ, a division of S&P.

The difficulty with Jos. A. Bank is that you can't directly compare its cash conversion cycle to companies like Nordstrom (NYSE:JWN), TJX Companies (NYSE:TJX), Men's Wearhouse (NYSE:MW), or Federated Department Stores (NYSE:FD), because of how Jos. A. Bank accounts for its occupancy costs. Most companies account for their occupancy costs in costs of goods sold, which is one of the line items used to calculate the cash conversion cycle. Jos. A. Bank accounts for its occupancy costs in its selling, general, and administrative expenses. This skews any comparisons to other companies, but it is still possible and reasonable to compare Jos. A. Bank to its past -- and that comparison is not pretty.

The bottom line is that a company has some leeway with what earnings it reports, and companies showing high levels of growth are the companies that deserve more scrutiny, not less. Most often there is reason to be suspicious of rapid growth when it comes at the cost of a weak balance sheet. What it looks like we're seeing with Jos. A. Bank is that eventually the quality of earnings does matter.

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At the time of publication, NathanParmelee had no financial interest in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.